Inflation Risk

Inflation Risk

Dividend income may not always keep pace with inflation, eroding purchasing power over time.

Fixed Dividend Payments

If a company does not regularly increase its dividend payments, the real value of the dividend income can decline as the cost of living rises.

This is particularly concerning for retirees who rely on dividends to cover living expenses.

  1. Example: A company that pays a constant annual dividend of $2 per share without increases will provide less purchasing power over time if inflation averages 2-3% annually.

Sector Vulnerability

Some high-dividend sectors, such as utilities and consumer staples, may have limited ability to pass on increased costs to consumers, making it harder to grow dividends in line with inflation.

  1. Example: Utility companies might face regulatory constraints that limit their ability to raise prices, impacting their capacity to increase dividends.